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Economists are accustomed to reporting price elasticities, which indicate the percentage reduction in quantity of a product that will be demanded when the price of a product increases by 1%. The focus on price elasticities might suggest that changes in prices are more important demand determinants than changes in other variables. Another possibility is that prices are observable. That is, we focus on price changes because we can see and measure them.

This new paper, published in Managerial and Decision Economics with Trey Malone, suggests other factors that are highly influential demand determinants. In particular, Trey designed a survey to measure preferences (and demand) for different beer brands at various prices. He asked people to answer choice questions like the one below.

The only difference across the choice questions were the prices assigned to brands. It is straightforward to calculate the typical own-price demand elasticities from these data - one simply has to observe how the frequency with which a brand is chosen changes when its price changes.

In addition to these standard questions, Trey and I also asked questions about consumer perceptions of each brand. Here is a partial screen shot of the question we asked on taste (a similar question was asked about familiarity).

Merging these data with the choice data, then, allows us to see how a change in perceived taste (or familiarity) affects choice.

One of the key challenges with this sort of analysis is that taste/familiarity perceptions might be endogenously determined with other variables, such that we don't really know whether we're measuring mere correlations or the causal impact of taste changes on choice. Our paper suggests a way to deal with this challenge. In short, it involves using perceptions for other brands as instruments for perceptions of another brand. I won't go into the details here, but we show the approach has a substantive effect on the results.

So, what did we find? Not surprisingly, taste and familiarity matter. But by how much? Here is a table of elasticities (not price elasticities, mind you, but taste elasticities).

We write:

Changes in perceived taste matter much more for the craft options (Marshall and Oskar Blues) than do changes in the perceived taste of the premium and macro options. For example, a 1% increase in the perceived taste of the Oskar Blues option leads to a 6.753% increase in the quantity demanded of that beer, whereas the same increase in the perceived taste of Corona leads to a 4.891% increase in its quantity demanded. Similar to the own-taste elasticities, relative to the familiarity elasticities, cross-taste elasticities are much larger. According to the model estimated via the control function approach, the perceived taste of Samuel Adams is the option most dependent on the perceived taste of the other beers. Specifically, the 1% increase in Corona’s perceived taste would also lead to a 1.339% reduction in the probability a Samuel Adams was selected, and the 1% increase in Oskar Blues’ perceived taste would create a corresponding 1.991% reduction in Samuel Adams’ quantity demanded.

Another result that probably won't be too surprising to many craft beer drinkers:

Once we control for endogeneity, our estimates indicate that some participants actually prefer an unfamiliar beer (i.e., they are variety seekers)